India’s Defence Budget 2025 allocates Rs 6.81 Lakh Crore with a pronounced focus on modernisation, procurement and enhanced R&D. While the initiative is ambitious, the declining share of defence spending in GDP raises critical questions about operational readiness and it’s likely adverse impact on national security.
Lt Gen Kapil Aggarwal (Retd), for The News Analytics Journal
a 4 mins read.
The Union Budget presented on 01 February 2025, by all accounts, appears to be a growth-oriented budget and was hailed by eminent Economists and Captains of Industry. The Government has estimated a nominal GDP growth rate of 10.1% in 2025-26 (i.e. real growth plus inflation). The Fiscal Deficit for the ensuing financial year is estimated to be 4.4% of GDP, continuing the process of fiscal consolidation. For the Financial Year 2024-25, the actual fiscal deficit is likely to end at 4.8% of GDP (the planned figure was 4.9%).
The Central Government Debt to GDP ratio is estimated to decline to 56.1 % in FY 2025-26 from 57.1 % in FY 2024-25. The Central Government debt is on a declining path to attain a debt to GDP level of about 50±1 per cent by 31st March 2031. The Government proposes to spend Rs 50.65 Lakh Crore in 2025-26, which is an increase of 7.4% over the Revised Estimate (RE) of 2024-25. Out of the total expenditure, Revenue Expenditure is estimated to be Rs 39.44 Lakh Crore and Capital Expenditure is estimated to be Rs 11.21 Lakh Crore (3.1% of GDP). Excluding loans and advances, the Capital Outlay has increased by just 10% over the RE 2024-25. The receipts (other than borrowings) in 2025-26 are expected to be Rs 34,20,409 Crore, an increase of 10.76% over the RE of 2024-25.
DEFENCE BUDGET
Total Allocation in the Defence Budget at the macro level is Rs 6.81 Lakh Crore, 13.45% of total Central Union Budget presented on 01 February 2025, by all account Expenditure and 1.85 % of GDP. It is a jump of 9.53% over the Budget Estimate (BE) of the previous year (Rs 6.16 Lakh Crore). Capital Outlay of Rs1.8 Lakh Crore, an increase of 4.65% over BE of 2024-25. It is 26.43% of the total Defence budget. Distribution amongst the three Services has not been given, ostensibly due to the unpredictability of the tedious procurement process. Out of this, Rs 1,48,723 crore is planned to be spent on Capital Acquisition, termed as the modernisation budget of the Armed Forces and the remaining Rs 31,277 crore is for capital expenditure on Research & Development and
the creation of infrastructural assets across the country.
Revenue(Excluding Pensions) of Rs 3.12 Lakh Crore is an increase of 10.24% over the BE of 2024-25. It is 45.76% of the total Defence budget. Out of this, Rs 1.14 Lakh Crore has been allocated on account of non-salary expenditure (ration, fuel, ordnance stores and maintenance/repair of equipment etc). The breakdown among the three Services are Air Force: Rs 53,700 Crore (increase of 16.1%), Navy: Rs 38,150 Crore (increase of 16.3%) and Army: Rs 2,07,520 Crore (increase of 7.7%). While budgetary support for DRDO has been Rs 26,817 Crore (increase of 12.4%). Out of this, a major share of Rs 14,924 crore has been allocated for capital expenditure and to fund the R&D projects.
The budgetary support for the BRO is Rs 7,146 Crore (increase of 9.74%). A substantial share of the modernisation budget is earmarked for domestic industries’ capital procurement. To encourage the private sector for manufacturing and technological development in the defence sector, a notable percentage of domestic share is further earmarked for acquisition from domestic private industries. Accordingly, for FY 2025-26, Rs 1,11,544 crore, i.e. 75% of the modernisation budget, has been earmarked for procurement through domestic sources and 25% of the domestic share, i.e. Rs 27,886 crore, has been set for procurement through domestic private industries.
A COMPARISON WITH 2024-25
The present budget allocation of Rs 6.81 Lakh Crore, although 9.5% higher than BE 2024-25, is just 6.2% higher compared to the Revised Estimate (RE) 2024-25 of Rs 6.41 Lakh Crore, (on an overall basis). This is evident from the interesting table below, which reveals that at the RE stage 2024-25, the revenue budget had to be increased by Rs 14,450 Crore, while the capital expenditure fell short by Rs 12,500 Crore. The major factors were the additional expenditure on operational sustainment (Revenue) while the
vagaries of the Defence Procurement Process took a toll on Capital expenditure.
DEFENCE BUDGET COMPARISION (IN RS CRORE)
OVERALL ANALYSIS
As outlined earlier, the Defence Budget 2025-26 has a total allocation of Rs 6.81 Lakh Crore, including approximately Rs 1.61 Lakh Crore in pensions. There is a perception of the Defence Budget being large and the need to cap it, especially the need to reduce the ever-burgeoning pension bill. Over the last 40 years, there has been a concerning decline in the Indian defence budget as a percentage of GDP, falling from about 3.5% to 1.85% in 2025-26. This is despite the Standing Committee on Defence (2018) recommending that the Ministry of Defence should be allocated a fixed budget of about 3% of the GDP to ensure adequate preparedness of the Armed Forces. If Pensions are excluded from the calculations, the Defence Budget stands at 1.41% of GDP.
It will also be of interest to compare the defence spending of our neighbouring and developed countries, the budgets as a percentage of GDP and overall Government expenditure. According to the data submitted by the Ministry of Defence to the Standing Parliamentary Committee on Defence in 2018, the Defence Expenditure comparison is as follows:-
It is evident that India can afford higher defence expenditure (from the perspective of GDP progression), yet the defence allocation is reducing in comparative terms vis a vis the overall Government expenditure. Over the last ten years, it is estimated that the money allocated to defence has been, on average, 22% lower than the projected needs by the armed forces.
From the brief analysis of earlier budgets, it is also evident that while revenue allocations have to be increased at the RE stage, the expenditure on the Capital account is sluggish and reappropriations have to be resorted to at RE stage. This is indicative of two aspects; one is that estimates of revenue expenditure tend to be conservative while Capital expenditure is beset with the tedious procurement process, even though there are a large number of pending modernisation projects. Since the pay and pension portion of revenue allocations of the defence budget tends to be inelastic, the brunt of
inadequate financial resources is borne by the capital portion, which in turn adversely affects the modernisation of Forces.
IMPLICATIONS ON NATIONAL SECURITY
Every nation determines the resources which need to be spared for the security and defence of its territorial sovereignty, based on its national security strategy. A developing nation has to juggle competing requirements of Education, Health, Poverty Alleviation, etc while finalising the resource allocation. However, for a country like India, surrounded by hostile neighbours on the Northern and Western front, along with internal security challenges, it is inexplicable that the defence budget as a percentage of GDP is in a secular multi-decadal decline, the modernisation budget is almost stagnant in real terms, while the national GDP has grown more than 10 times in last three decades.
Operational preparedness of the Defence Forces, which directly impinges on national security, is a function of Soldier Readiness (Staffing and Training), Equipping & Equipment Readiness, together with the Doctrine, Strategy and Tactics. Thus, if equipping the armed forces with state-of-the-art, modern-generation fighter aircraft, warships, missiles, drones, guns, armoured vehicles, etc, is delayed while the adversaries upgrade their military, it is bound to have a debilitating effect on operational preparedness. The inadequate financial resources make for the larger cause for these delays.
With Rs 1.11 Lakh Crore (75% of the modernisation budget) reserved for the Indigenous Defence Industrial base, in consonance with the Atmanirbhar policy, it is imperative that both the public and private sector upgrade their technological and manufacturing capabilities expeditiously. For this to happen, the resources allocated for R&D have to be substantially increased, both at the Ministry of Defence level as well as the private sector. India is currently spending just about 0.75% of its GDP on R&D, which is very low, the world average being 1.8%. This is inadequate for the development of new technologies and state-of-the-art weapon systems in the long run.
The Ministry of Defence has decided to observe 2025-26 as the ‘Year of Reforms’, which will give impetus to the modernisation of armed forces by simplification in the Defence Procurement Procedure (DPP) to ensure optimum utilisation of the allocation. Hopefully, the revision of DPP this time will enhance the ease of doing business for the private sector and encourage them to grab the numerous opportunities in the defence space.
THE BOTTOMLINE
Indian Defence spending, whether as a percentage of GDP or on a pro-rata basis, is decreasing gradually and continuously. The Defence funding is lower in comparison to most countries of interest, even though India has higher security concerns. Salary and pension bills being rather inelastic, the funding squeeze will either be on Capital Expenditure (read modernisation) or on Operational Sustenance of armed forces. This has adverse implications for overall national security.
Higher ab-initio allocation is required for the operational sustenance of armed forces. However, there is evidence of commendable flexibility in additional funding of defence requirements at the RE stage, based on operational requirements. Within the Defence Budget, the focus is on modernisation and infrastructure; however, procedural constraints seem to hamper the full absorption of allocated funds. The proposals of the 15th Finance recommendation on non-lapsable modernisation funds have to be implemented. It is also evident that Capital Outlay for procuring modern Weapon Systems/ Platforms can increase significantly only if higher funds are allotted to defence, i.e. a higher percentage of GDP or central government expenditure.
The initiatives on the Indigenisation of Defence Manufacturing are a potent way to conserve capital and need to gather further pace. Atmanirbhar is the way to go, but it will require an increase in domestic production capacity and upgraded technological prowess, for which higher R&D expenditure is required. Overall, a way has to be found in the ensuing decade to reverse the decline in defence spending as a percentage of GDP, accelerate the modernisation of armed forces and have a higher defence contribution in the Comprehensive National Power of India. This remains an unambiguous requirement to ensure the nation remains well-prepared against all security threats.
(Lt Gen Kapil Aggarwal (Retd), former Director General EME. He is an alumnus of IIT Kharagpur, having done MTech (Electronics). The views expressed are of the author and do not necessarily reflect the views of The News Analytics Journal.)
